Global Policy Forum

Solution to the Global Financial Crisis:


By Michel Chossudovsky

Following the dramatic nosedive of the Russian ruble, financial markets around the World had plummeted to abysmally low levels. The Dow Jones plunged by 554 points on August 31st, its second largest decline in the history of the New York Stock Exchange. In the uncertain wake of "black September 1998", G7 ministers of finance had gathered hastily in Washington. On their political agenda: a multibillion dollar plan to avert the risks of a Worldwide financial meltdown. In the words of its political architects US Treasury Secretary Robert Rubin and UK Chancellor of the Exchequer Gordon Brown: "we must do more to . . . limit the swings of booms and busts that destroy hope and diminish wealth."1

Announced by President Bill Clinton in late October, the G7 proposal to install a 90 billion-dollar fund "to help protect vulnerable but essentially healthy nations" from currency and stock market speculation will go down in history as the biggest financial scam of the post-war era.

Hidden Agenda

Skillfully presented to the international community as a timely "solution" to the global financial crisis, the establishment of a "precautionary fund" under IMF stewardship proposes to deter "financial turbulence spreading from country to country in a contagion process." The underlying objective is "to send a clear message to speculators that they may be taking big risks if they [short] sell a nation's currency."2

Yet in practice, the G7-IMF artifice accomplishes exactly the opposite results. Rather than "taming the speculator" and averting financial instability, the existence of billions of dollars stashed away in a "precautionary fund" (safely established in anticipation of a crisis) is likely to entice speculators to persist in their deadly raids on national currencies . . .

The multibillion dollar fund was not devised (as claimed by its architects) to help nations under speculative assault; on the contrary, it constitutes a convenient "safety net" for the "institutional speculator." "The money is there" to be drawn upon and the speculators know it. If central banks in Asia or Latin America (in an abortive attempt to prop up their ailing currencies) were to contemplate defaulting on their (forward) foreign exchange contracts, the precautionary lines of credit (serving as a "backup") would enable banks and financial institutions to swiftly collect their multibillion dollar loot.

In other words, the money "to bail out the speculators" would be readily available and accessible well in advance of a currency crisis. Moreover, the IMF sponsored "rescue operation" would no longer hinge upon clumsy ad hoc negotiations put together hastily in the cruel aftermath of a currency devaluation.

Whereas the IMF would still be called in to impose even harsher economic measures, the bailout money would be "available up front": no nervous last minute meeting as on Christmas eve (24 December 1997) when Wall Street bankers met behind closed doors (under the auspices of the New York Federal Reserve Bank) to put the finishing touches on the renegotiation of Korea's short-term debt.3

Reducing Risks for Banks and Financial Institutions

Rather than repelling the speculator, the existence of the precautionary fund significantly diminishes the risks of conducting speculative operations. Not surprisingly, the global banks and investment houses (well versed in the art of financial manipulation through their affiliated hedge funds) have unequivocally endorsed the G7-IMF policy initiative. Barely analyzed by the global media, the scheme will reinforce the command of "institutional speculators" over global financial markets as well as their leverage in imposing ruthless macroeconomic reforms.

A Marshall Plan for the Speculator

A colossal amount of money has been allocated (from tax payers' wallets) to "financing" future speculative assaults: the 90 billion dollar scheme constitutes a "Marshall Plan for institutional speculators" representing an amount (in real terms) roughly equal to the entire budget of the Marshall Plan (86.6 billion dollars at 1995 prices) allocated between 1948 and 1951 to the post-War reconstruction of Western Europe.4

Yet in sharp contrast to the Marshall Plan, the money transferred under both the Asian bailouts (more than $100 billion) and the proposed G7-IMF precautionary fund ($90 billion) contribute "to lining the pockets" of the global banks leading to an unprecedented accumulation of money wealth. None of this money will be channelled into rehabilitating the shattered economies of developing countries. Under the new IMF Facility for contingency financing, international banks and financial institutions will be able to swiftly collect debts (from developing countries) initially up to the 90 billion dollars ceiling.

Of this amount, some 30-40 billion dollars have already been carefully set aside to ensure that Brazil (following massive capital flight) does not default to its Wall Street creditors. In return, President Fernando Henrique Cardoso, faithful to his financial masters, has committed the Brazilian government to sweeping austerity measures which will drive large sectors of Brazil's population (including the middle classes) into abysmal poverty. In this regard, the IMF's economic therapy in Brazil promises to be more unmerciful than that applied in Asia. In turn, the cost of servicing the precautionary line of credit will be substantially higher.

The remaining 50-60 billion dollars is available to be used to "finance" future speculative raids and bailout agreements (e.g.. in Latin America, the Middle East and South Asia) leading to the concurrent dismantling of national-level monetary policy. This destructive process, however, does not terminate once the 90 billion dollar ceiling has been reached: once the money has been used up, the precautionary fund (established as a "standing arrangement") can if required be replenished (with contributions from G7 countries).

A Massive Transfer of Money Wealth

The transfer of wealth resulting from currency speculation is unprecedented in modern history. Solely in Asia, more than 100 billion dollars of foreign exchange reserves have been confiscated since mid-1997. Another 90 billion dollars are envisaged under the precautionary scheme. And these amounts do not include the collection of private debts nor the value of assets appropriated by Western capital under the privatisation programmes (estimated for Russia alone to be more than five times the Marshall plan). In return, Russia will receive a meagre 500 million in US Food Aid on condition it faithfully conforms to the IMF's economic agenda.

The Demise of Monetary Policy

Through their decision, G7 leaders have sanctioned the destruction of monetary policy and the derogation of national economic sovereignty. Through the manipulation of currency markets, billions of dollars of money wealth will be transferred from the vaults of central banks into private financial hands.

Total available foreign exchange reserves in the vaults of the World's central banks is less than the daily forex turnover of more than 1,200 billion dollars. A small number of global creditors will control money creation.

In turn, this demise of central banks has contributed to dramatically boosting the levels of global debt while furthering the process of economic and social collapse. G7 political leaders bear a heavy burden of responsibility in adopting a scheme which contributes to aggravating the global economic crisis. Moreover, they have blatantly misled the international community on the likely consequences of the multibillion dollar precautionary fund.

Boosting the Levels of Global Debt

The speculative assaults not only boost the levels of external debt in developing countries (eg. Korea, Indonesia, Brazil), they also contribute to heightening the debt burden in G7 countries: the financing of the bailouts (under the multibillion precautionary fund) will largely come from the public purse requiring the issuing by G7 governments of vast amounts of public debt. Ironically, the latter will be underwritten by the same investment banks routinely involved in the speculative assaults.

In other words, the G7 proposal is conducive to a massive increase in the levels of public debt while at the same time creating conditions which accelerate the collapse of production and employment. The latter in turn trigger the accumulation of large amounts of personal (household) debts, nonperforming loans of small and medium sized enterprises, etc., leading to bankruptcies and loan forfeiture.

The "Privatisation" of the IMF Bailouts

The 90 billion dollar deal was hastily put together by US Treasury officials following consultations behind closed doors with the representatives of the World's largest banks and brokerage houses. The precautionary facility is to provide "short-term" contingency financing at substantially higher interest rates (300 to 500 base points above the IMF standard lending rates).

In other words, financing will be available at 3 percent (or more) above the current IMF soft lending rate of 4.7 percent. This pattern imposed by the US Congress in October (in relation to the $18 billion US contribution to the fund) violates the statutes of the IMF as an intergovernmental body; it derogates the Bretton Woods agreement of 1944. While it increases the burden of servicing the debt under the bailout, it also reduces the repayment period (ie. from the standard three to 10 years to one to 2.5 years). In other words, the bailout money provided under the fund would (within a short period of time) have to be rescheduled with private lending institutions at market rates of interest.

In other words, the G7-IMF scheme not only artificially inflates the debt burden (by hiking up interest rates), it also establishes conditions which favour the eventual "privatisation" of the bailouts. In this context, "policy conditionalities" would be negotiated by the global banks (rather than by the IMF): "[M]echanisms could be designed ahead of time to ensure the timely involvement of the private [banking] sector in providing liquidity support to countries in times of financial stress."5

Overhauling the IMF

The banks have hinted that what they really want is a de facto private sector bureaucracy (which they can more effectively control) rather than a cumbersome intergovernmental body. This overhaul of the IMF is to be carefully supervised by the US Treasury acting on behalf of Wall Street. In other words, the IMF has also been brought more directly under the political trusteeship of the US Administration in blatant violation of its intergovernmental status. Overshadowing the IMF (and limiting its authority to conduct future negotiations with member governments), the Congressional appropriation bill had identified precise loan conditionalities" to be inserted in future IMF bailouts (including provisions which facilitate the dumping of US grain surpluses as well as the "enactment of bankruptcy laws that treat foreigners fairly").

Speculators call the Shots on Crisis Management

After the meltdown of Wall Street on Black Monday 31st of August 1998, G7 leaders had pointed nervously to the need for "taming financial markets." Proposals to control the unfettered movement of money had been put forth. British Prime Minister Tony Blair highlighting the shortcomings of the IMF, had called for an overhaul of the Bretton Woods institutions: "the existing system has not served us terribly well . . . "6

Mea culpa by renowned speculator George Soros: "financial markets are inherently unstable, which can cause tremendous damage to society."7 Frictions between the Bretton Woods sister organisations had also surfaced at their annual meetings in October 1998. In an admonishing statement, the Senior Vice President of the World Bank Joseph Stiglitz publically expressed his disapproval of the Washington consensus.

In the meantime, despite renewed stock market instability in developing countries, the storm had temporarily settled on Wall Street much to the relief of New York's major brokerage houses. Caving in to the demands of the global banks, the issue of capital controls had been casually dropped from the political agenda: "the new buzz-words are `sequencing', `orderly capital account liberalisation', `regulations, yes, restrictions, no'."8

A new invigorated "Washington consensus" was in the making. The unfettered movement of capital was presented as the sole means to achieving global prosperity. According to UBS-SBC George Blum and Citigroup's William Rhodes speaking on behalf of some 300 global banks and brokerage houses: "capital controls will seriously damage medium-term prospects for raising standards of living".9

Neoliberal economic policy was alive, speculators rather than elected politicians were calling the shots. G7 leaders together with the Bretton Woods institutions had formally invited the global banks "to be involved appropriately in crisis management and resolution".10 In an absurd logic, those who foster financial turbulence are called in to identify policies which attenuate financial turbulence . . .

In turn, the broader structural causes of the economic crisis remain unheralded. Blinded by neoliberal dogma, policy makers are unable to distinguish between "solutions" and "causes." Public opinion is misled. Lost in the barrage of self-serving media reports on the deadly consequences of "economic contagion", the precise "market mechanisms" which trigger financial instability are barely mentioned.

Despite mounting criticism directed against the Bretton Woods institutions, the G7 decision not only upholds but strengthens the IMF's lethal economic medicine as the unequivocal "solution" when in fact it is the "cause" of economic collapse and financial turmoil.

With the exception of token rhetorical statements on the destabilising impacts of currency and stock market speculation, no concrete revisions of the macroeconomic agenda have been put forth. The G7-IMF precautionary fund "entrenches" the rights of speculators"; it provides an unconditional "green light" to financial institutions to "short sell" national currencies all over the world.

Dismantling the State: Towards the Development of a Private Sector Bureaucracy

The global banks decide on what constitutes a "politically correct" economic agenda. The new "financial architecture" is to be based on the removal of all remaining barriers to capital movements.

According to Alan Greenspan, chairman of the US Federal Reserve Board, financial markets are too complex for public regulators to oversee: "Twenty-first century regulation is going to increasingly have to rely on private counterparty surveillance to achieve safety and soundness [of financial markets] . . . "11

More generally, the tendency is toward a system of "private regulation" (under the direct control of banks and MNCs) in which governments and intergovernmental bodies would play a subsidiary role. In other words, the stranglehold of creditors over the State apparatus in all major regions of the world (including North America and Western Europe) is conducive to the development of a private sector bureaucracy which oversees activities previously under State jurisdiction.

This dismantling of the State, however, is not limited to the privatisation of social programmes and public utilities, corporate capital also aspires to eventually acquire control over all State- supported "civil society activities." Cultural activities, the performing arts, sports, community services, etc., would be transformed into profit making ventures. In this regard, the proposed Multilateral Agreement on Investment (MAI) purports to deregulate foreign investment, dismantle State institutions and transform all State supported "civil society activities" (eg. at municipal level) into money making operations.

"Taming the Tigers"

In parallel with the forced removal of impediments on the movement of capital through the disruption of currency markets, the political power brokers of the "free market" will continue their relentless drive to entrench the rights of banks and corporations in several legally binding agreements including the Multilateral Agreement on Investment (now under WTO auspices) and the equally controversial amendment of the IMF articles on capital account liberalisation.

Combined with overt political pressures by Washington, the G7-IMF multibillion dollar fund will also be used to finance future speculative assaults on countries such as China (including Hong Kong), Malaysia, Taiwan, Chile and more recently Russia (under Prime Minister Primakov) which have defied the "free market" by adopting foreign exchange restrictions and/or controls on speculative transactions. The Taiwan authorities, for instance, took measures "to prevent illegal trading of funds managed by George Soros which have been blamed for causing the local stock market to fall."12 Hong Kong has introduced measures which curb short-selling of stocks and currency speculation.13

The G7 scheme (coupled with the decision not to hamper the movement of money) is intent on weakening these initiatives and destabilising local-level capitalism; the ultimate objective is to deregulate currency markets, break down remaining impediments to the movement of capital and dismantle State control over monetary policy.

Speculators and Creditors get Cold Feet

By legitimising mechanisms which boost global debt and destabilise national economies, G7 policy makers have also "sown the seeds of destruction." The creation of unsurmountable debts is backfiring on the World's most powerful financial actors. The resulting dislocations in production, the "drying up" of consumer markets (following the simultaneous collapse in the standard of living in a large number of countries) has resulted in a proliferation of nonperforming loans.

The inexorable accumulation of global wealth has backlashed on the real economy leading to the disengagement of human and material resources. Physical assets stand idle or are withdrawn from the market process resulting in plant closures, layoffs and corporate bankruptcies. Poverty and unemployment are the result of massive overproduction (marked by overcapacity) in virtually all sectors of activity.

The speculators are caught in the twirl: in a cruel irony, financial turmoil is backfiring on the financial institutions which provoked market instability in the first place. Bank losses are not limited to Korea, Japan or China; some of the West's largest financial institutions (involved in shaky investment deals, high risk trade in hedge funds, "heavy exposure" to emerging market debt, etc.) are now getting "a bitter taste of their own economic medicine."

Heavy bank losses have also triggered the layoff of thousands of employees on Wall Street. At J. P Morgan, Merrill Lynch and Credit Suisse- First Boston, etc., previously affluent and successful brokers have been ruthlessly driven onto the streets.

The Destabilising Impacts of the Hedge Funds

Some of the World's largest banks and brokerage houses on both sides of the Atlantic have incurred heavy losses: Citigroup, Bank America, the Dresdner and Deutsche banks (hit by massive default on Russian debt), UBS-SBC, Credit Lyonnais, Merrill Lynch, ING Baring, Credit Suisse- First Boston, to name but a few. Most of these banks can be considered as "institutional speculators" with formal links to their numerous affiliated hedge funds. UBS is under investigation in Switzerland for its shady deals with the LTCM hedge fund; Bank America, the largest US bank, has declared a 1.4 billion credit loss following the demise of its Wall Street hedge fund D. E. Shaw.14

Rather than curbing speculative trade, the G7-IMF precautionary fund provides a "green light" to the hedge funds routinely involved in speculative operations. A large share of these hedge funds operate from offshore banking havens to escape government regulation and taxes.

The political consensus among G7 ministers of finance is that it would be unwise to regulate the hedge funds. Echoing Wall Street and the US Federal Reserve Board, the Bank of England has urged hedge funds "to regulate themselves" underscoring the fact that "tighter regulation of hedge funds could prove self-defeating."

The dramatic rescue by a consortium of Wall Street firms of the LTCM hedge fund in September 1998 (crippled with debts of more than three billion dollars) is but the tip of the iceberg in a global cobweb of over four thousand hedge funds. LTCM was run by a former Salomon Brothers executive, John Meriwether.

Described as "pool partnerships of wealthy investors", the hedge funds were created and bred by the financial establishment, serving the interests of the banks, corporations and rich individuals. They have become an integral part of the structures of investment banking with "reported capital" of some 300 billion dollars. However, through "highly leveraged operations", this capital of 300 billion has been multiplied to reach astronomical figures: LTCM's fund manager John Meriwether, for instance, had invested 500 million for every million in capital with operations totalling an estimated "exposure" of 200 billion dollars. The latter amount is the "exposure" (through shady investments in emerging markets) of a single hedge fund out of a total of four thousand hedge funds! Needless to say, a large share of hedge fund business transacted in the offshore banking havens goes unreported.

The hedge funds have contacts in high places; they also wield considerable influence in determining the direction of G7 reforms. They have the ability of moving billions of dollars around the world overnight overshadowing the powers of governments. Their operations are predicated on the manipulation of market forces: the hedge funds capture large amounts of wealth from the real economy ultimately leading to the accumulation of enormous debts and the demise of productive activity.

Combined with the plight of the peripheral bond markets, a failure of the hedge funds would backlash on the entire structure of Western banking including its more than 55 offshore facilities (eg. Cayman Islands, Bermuda, Luxembourg, etc.). In turn, stock market instability threatens the future of mutual funds and pension funds (many of which also include speculative investments in their portfolio).

The Merger Frenzy

The G7's "new financial architecture" favours an atmosphere of cutthroat competition leading to a new wave of mega-mergers and acquisitions. In turn, the merger frenzy has contributed to artificially boosting the New York Stock Exchange to new record heights. The multibillion spoils of currency and stock market speculation are channelled toward the acquisition of real assets: the enormous cash reserves accruing to institutional speculators are also recycled toward the financing of corporate mergers including the purchase of state assets under the numerous privatisation programmes.

In turn, currency speculation in emerging markets has favoured the dislocation of national capitalism in Asia and Latin America and the demise and subordination of the local economic elites leading to an unprecedented concentration of global economic and financial power. In the wake of the IMF sponsored bailouts, global corporations --out on a lucrative shopping spree in Asia-- have acquired control over numerous "troubled" national enterprises and financial institutions.

Global Alliances

The formation of new "global alliances" between European and American capital has rapidly changed the balance of power in the World market. With the merger boom, British and German banking interests have (inter alia) joined hands with Wall Street leading to the formation of powerful financial giants.

Banker's Trust-Deutsche Bank, BP-Amoco, Daimler-Chrysler, to name but a few: the mega-mergers are proceeding at a very rapid pace in banking, mining, oil and gas, etc., as well as in the "high tech" industries (computers, telecommunications, electronics, bio-genetics). The mega-mergers are also contributing to redefining the geopolitical landscape of the post-Cold war era. Whereas the former Soviet Union has been defeated as a superpower, the onslaught of the Asian currency crisis has significantly undermined the economic dominion of Japan in the Asia-Pacific region.

In turn, the Euro-American banking conglomerates are shareholders in the World's largest industrial corporations (eg. Deutsche Bank has a sizable stake in Daimler-Chrysler), they also oversee the restructuring of national economies (under the bailout agreements) in Eastern Europe, the Balkans, Latin America and South East Asia. These "Atlantic corporate alliances" in banking and industry seek to edge out weaker competitors including their Japanese rivals. Moreover, financial deregulation has also opened up the Japanese economy to corporate buyouts by Western investment banks. Supported by the G7-IMF economic agenda, the expansion of Euro-American capital into new frontiers is contributing to undermining Japan's position as an economic power.

Economic Falsehoods

A "false consciousness" has invaded all spheres of critical debate and discussion which masks the workings of the global economic system; at the same token, it also prevents the international community from acknowledging its devastating impacts on people all over the World. What are the causes of the crisis as well as the powerful financial interests which are responsible for financial turbulence and economic dislocation?

Public opinion has been skillfully misled: the Western economy is said to be "healthy"; "economic infection" is "spreading" from Asia and Russia (designated as "sick economies"); politicians, mainstream economists and the Western media have contributed to trivialising and distorting the causes of the global economic crisis, not to mention the formulation of stylized "solutions": "we must stave off the growing flu because flu proves to be contagious."

Freezing Speculative Transactions

The most urgent task consists in subjecting financial markets to public scrutiny and social control. A Tobin tax will not suffice in reversing the tide of destruction: "financial disarmament" requires freezing (nationally and internationally) the entire gamut of speculative instruments, dismantling the hedge funds, reintroducing controls on the international movement of money and progressively breaking down the structures of offshore banking which provide a safe haven to "dirty money" and the flight of undeclared corporate profits. While these "preventive measures" do not constitute a (long-term) "solution" to the global economic crisis, they would nonetheless contribute to significantly slowing down the accumulation of money wealth and attenuating the devastating impacts of currency and stock market speculation on millions of people. In the words of Malaysia's Prime Minister Mohamad Mahathir: "unless speculative] currency trading is recognised as the root cause of the present problem, corrective actions cannot be made . . . Cosmetic adjustments will not do any good at all."15

Dismantling the Washington Consensus

Beyond the adoption of short-term "preventive" measures geared toward freezing speculative trade, far-reaching changes in the structures of the global economic system are required, which reverse the concentration of financial power and restore the democratic control of society over the levers of economic policy. As a first step, the "Washington consensus" must be broken, the IMF's lethal economic medicine must be discarded; in turn the mechanics of macroeconomic reform must be reversed requiring the establishment of "an expansionary economic agenda" geared toward restoring wages and alleviating global poverty.

Of crucial importance is the concurrent "democratisation of central banks." Under the present setup, creditors and speculators control money creation including the financing of State economic and social programmes, the payment of wages, etc. In other words, what is at stake is not only the cancellation of enormous public debts held by private financial institutions but also the "re-appropriation" by society of monetary policy, --ie. the democratic control by society of money creation and the process of financing economic and social development.

In turn, the process of dismantling the Washington consensus will also require (in close coordination with the process of "financial disarmament") the continued struggle against a number of legally binding international agreements (eg. under WTO and IMF auspices) which establish an "enabling environment" for MNCs and global banks.

1. Quoted in Financial Times, London, 31 October-1 November 1998. See also G7 Communique, October 30, 1998.
2. David Sanger, "Wealthy Nations back Plan to Speed Help to the Weak", New York Times, 31 October 1998.
3. See Financial Times, London, 27-28 December 1997, p. 3.
4. See US Bureau of Labour Statistics, Purchasing Power of the Dollar, 1950-1995. The Marshall Plan transferred 13 billion dollars of US aid from 1948 to 1951, equivalent to 86.6 billion dollars at 1995 prices. See also Barry Eichengreen and J. Bradford de Long, The Marshall Plan: History's most Successful Structural Adjustment Programme, CEPR discussion paper, May 1992.
5. IMF, Strengthening the Architecture of the International Monetary System, Washington, October 1998, p. 5.
6. Financial Times, 21 September 1998, p. 1.
7. Reuters (press dispatch), 10 November 1998.
8. See Robert Wade, ''Behind the Big Push for Free Movement of Capital", Third World Resurgence, No. 98, October 1998.
9. Institute of International Finance, Press Release, Tokyo, 13 September 1998.
10. G7 Communique, October 30, 1998.
11. Quoted in "Greenspan urges Repair of Global Architecture", American Banker, October 1998.
12. Martin Khor. "Tide turning on Financial Free Market", Third WorldResurgence, no. 98, 1996, p. 32.
13. Ibid.
14. Financial Times, London, 15 October 1998, p. 1.
15 Mohamad Mahatir, quoted in the Strait Times, 3 November 1998.

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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.